Loyalty points tax rules relaxed
In a surprisingly generous yet sensible move, the Canada Revenue Agency has relaxed its long-standing administrative policy on the taxability of loyalty points earned while travelling on employer-paid business trips or incurring reimbursable business expenses.
In adopting the new policy, the CRA seems to be taking guidance from its U. S. counterpart, the Internal Revenue Service, which adopted a similar measure back in 2002, acknowledging at the time that it had not been actively enforcing the reporting of benefits associated with accumulating "employer-earned" points.
Many employees collect loyalty points such as frequent flyer miles on their personal credit cards and are allowed to keep those points for personal use, even when the underlying travel or business expense is paid for by their employers.
The points are then used by the employee for free travel, merchandise or gift certificates.
CRA has traditionally taken the position that if the employer does not control the points accumulated under such programs, it is up to the employee to determine the fair market value of the free trip, or merchandise received, and voluntarily include that amount in his or her income for the year the trip was enjoyed or the merchandise received.
Practically speaking, this has always been a challenge for employees for two reasons. What is the fair market value of that free flight to Las Vegas? More significantly, was that free vacation attributable to points earned while flying on employer business or to points earned on personal spending charged to that same credit card? If points are commingled, which points are deemed to be used first: the taxable employer-earned points or the non-taxable personally-earned points?
Beginning this year, the CRA announced it will no longer require these employment benefits to be included in an employee's income, as long as the points are not converted to cash, the plan is not considered to be an "alternate form of remuneration" and the plan is not for tax-avoidance purposes.
CRA cites the example of "Pauline," whose employer allows her to use her personal credit card whenever possible to pay for business expenses, which her employer subsequently reimburses. To maximize her points, Pauline uses her own card to purchase other employees' business travel.
The CRA has indicated that Pauline must include the value of the points on her tax return, since it appears to be "indicative of having been made in order to provide a benefit to the employee as an alternate form of remuneration."
One final note: If the employer controls the points, such as on a corporate credit card, then it continues to be CRA's view that the employer will continue to be required to report the fair market value of any benefits received by the employee on the employee's T4 slip when the points are redeemed.